MOA and AOA.pptx

companies act , memorandum of association and articles of association of a company

1. MEMORANDUM OF ASSOCIATION -

2. Memorandum of Association is a legal document which describes the purpose for which the company is formed. It defines the powers of the company and the conditions under which it operates. It is a document that contains all the rules and regulations that govern a company’s relations with the outside world. It is a foundation on which the company is made. The memorandum is a public document.

3. Memorandum of Association is essential for registration of a company. Section 7(1)(a) of the Act states that for incorporation of a company, Memorandum of Association and Articles of Association of the company should be duly signed by the subscribers and filed with the Registrar. In addition to this, a memorandum has other objects as well. These are, 1. It allows the shareholders to know about the company before buying it shares. This helps the shareholders determine how much capital will they invest in the company. 2. It provides information to all the stakeholders who are willing to associate with the company in any way

4. Format of Memorandum of Association Section 4(5) of the Companies Act states that a memorandum should be in any form as given in Tables A, B, C, D, and E of Schedule 1. The Tables are of different kinds because of different kinds of companies. Table A – It is applicable to a company limited by shares. Table B – It is applicable to a company limited by guarantee and not having a share capital. Table C – It is applicable to a company limited by guarantee and having a share capital. Table D – It is applicable to an unlimited company not having a share capital. Table E – It is applicable to an unlimited company having a share capital. The memorandum should be printed, numbered and divided into paragraphs. It should also be signed by the subscribers of the company.

5. Content of Memorandum of Association Section 4 of the Companies Act, 2013 states the contents of the memorandum. It details all the essential information that the memorandum should contain. Name Clause - The first clause states the name of the company. Any name can be chosen for the company. But there are certain conditions that need to be complied with. Section 4(1)(a) states: If a company is a public company, then the word ‘Limited’ should be there in the name. Example, “Robotics”, a public company, its registered name will be “Robotics Limited”. If a company is a private company, then ‘Private Limited’ should be there in the name. “Secure “a private company, its registered name will be “Secure Private Limited”. This condition is not applicable to Section 8 companies.

6. Undesirable names are those names which in the opinion of the Central Government are: 1. Prohibited under the Provisions of Section 3 of Emblems and Names (Prevention and Improper Use) Act, 1950. 2. Names which resemble each other, which are chosen to deceive. 3. The name includes a registered trademark. 4. The name includes any word or words which are offensive to a section of people. 5. Name which is identical to or too nearly resembles the name of an existing Limited Liability Partnership

7. Reservation of a Name Section 4(5)( i ) of the Act states that for formation of the Company, the Registrar on receiving the required documents can reserve a name for 20 days. If the application is made by an existing company, then once the application is accepted, the name will be reserved for 60 days from the date of application. The company should get incorporated with the reserved name in these 60 days. If after making the reservation of a name, it is found that some wrong information is given. Then two cases arise.  In case the company has not been incorporated. In this case, the Registrar can cancel the reservation of the name and impose a fine of Rupees 1,00,000.  In case the company has been incorporated. In this case, after hearing the reasons of the company, the Registrar has 3 options. These are, On being satisfied, he can give 3 months’ time to the company To change the name by passing an ordinary resolution. He can strike off the name from the Register of Companies. He can file a petition of winding up of the company

8. Registered Office Clause The Registered Office of a company determines its nationality and jurisdiction of courts. It is a place of residence and is used for the purpose of all communications with the company. Section 12 of the Companies Act, 2013 talks about Registered Office of the company. Before incorporation of the company, it is sufficient to mention only the name of the state where the company is located. But after incorporation, the company has to specify the exact location of the registered office. The company has to then get the location verified as well, within 30 days of incorporation.

9. Object Clause- Section 4(c) of the Act details the object clause. It states the purpose for which the company is formed. The object clause contains both, the main objects and matters which are necessary for achieving the stated objects also known as incidental or ancillary objects. The stated objects must be well defined and lawful according to Section 6(b) of the Companies Act, 2013

10. By limiting the scope of powers of the company. The object clause provides protection to: Shareholders – The object clause clearly states what operations will the company perform. This helps the shareholders know their investment in the company will be used for what purpose. Creditors – It ensures the creditors that capital is not at risk and the company is working within the limits as stated in the clause. Public Interest – The object clause limits the number of matters the company can deal with thus, prohibiting diversification of activities of the company

11. Doctrine of Ultra Vires - If the company operates beyond the scope of the powers stated in the object clause, then the action of the company will be ultra vires and thus void. Consequences of Ultra Vires 1. Liability of Directors: The directors of the company have a duty to ensure that company’s capital is used for the right purpose only. If the capital is diverted for another purpose not stated in the memorandum, then the directors will be held personally liable. 2. Ultra Vires Borrowing by the Company: If a bank lends to the company for the purpose not stated in the object clause, then the borrowing would be Ultra Vires and the bank will not be able to recover the amount. 3. Ultra Vires Lending by the Company: If the company lends money for an ultra vires purpose, then the lending would be ultra vires. 4. Void ab initio – Ultra Vires acts of the company are considered void from the beginning. 5. Injunction – Any member of the company can use the remedy of injunction to prevent the company from doing ultra vires acts

12. Liability Clause The Liability Clause provides legal protection to the shareholders by protecting them from being held personally liable for the loss of the company.

13. Capital Clause: It states the total amount of share capital in the company and how it is divided into shares. The way the amount of capital is divided into what kind of shares. The shares can be equity shares or preference shares. Illustration: The share capital of the company is 1,20,00,000 rupees, divided into 3000 shares of 4000 rupees each

14. Subscription Clause - The Subscription Clause states who are signing the memorandum. Each subscriber must state the number of shares he is subscribing to. The subscribers have to sign the memorandum in the presence of two witnesses. Each subscriber must subscribe to at least one share. Association Clause - In this clause, the subscribers to the memorandum make a declaration that they want to associate themselves to the company and form an association.

15. In case of one-person-company, in addition to all the other clauses, the Memorandum of Association contains a clause called the Nomination Clause. This clause mentions the name of an individual who will become the member in case the subscriber dies or becomes incapacitated. The nominee must be an Indian citizen and resident of India i . e. he must have been living in India for at least 182 days in the preceding year. A minor cannot be a nominee. The individual whose name is mentioned should give his consent in written form and it is required to be filed with the Registrar of Companies at the time of incorporation. If the nominee wants to withdraw, he shall give it in writing and the owner of the company will have to nominate a new person within 15 days.

16. What’s the use of Memorandum of Association? 1. It defines the scope & powers of a company, beyond which the company cannot operate. 2. It regulates company’s relation with the outside world. 3. It is used in the registration process; without it the company cannot be incorporated. 4. It helps anyone who wants to enter into a contractual relationship with the company to gain knowledge about the company. 5. It is also called the charter of the Company, as it contains all the details of the company, its members and their liabilities.

17. Alteration, Amendment & Change in Memorandum of Association under Companies Act, 2013 The term “alter” or “alteration” is defined in Section 2(3) of the Act, as any additions, omissions or substitutions. A company can alter the memorandum only to the extent as permitted by the Act. 100 According to Section 13, the company can alter the clauses in the memorandum by passing a special resolution. A resolution is a formal decision taken in a meeting. There are two kinds of resolutions, ordinary and special. A special resolution is one which requires at least 2/3rd majority to be effective. The alteration to the clauses also requires the approval of the Central Government in writing

18. Articles of Association - The Companies Act, 2013 defines ‘articles’ as the “articles of association of a company originally framed, or as altered from time to time in pursuance of any previous company laws or of the present.” The Articles of Association of a company are that which prescribe the rules, regulations and the bye-laws for the internal management of the company, the conduct of its business, and is a document of paramount significance in the life of a company.

19. It prescribes several details of the company’s inner workings such as the manner of making calls, director’s/employees’ qualifications, powers and duties of auditors, forfeiture of shares etc. In fact, the articles of association also establish a contract between the members and between the members and the company. This contract is established, governs the ordinary rights and obligations that are incidental to having membership in the company

20. It must be noted, however, that the articles of association, are subordinate to the memorandum of association of a company, which is the dominant, fundamental constitutional document of the company. Further, as laid down in Shyam Chand v. Calcutta Stock Exchange, any and all articles that go beyond the memorandum of association will be deemed ultra vires. Therefore, there should not be any provisions in the articles that go beyond the memorandum. In the event of a conflict between the memorandum and the articles, the provisions in the memorandum will prevail. In case of any ambiguity or uncertainty regarding details in the memorandum, it should be read along with the articles.

21. Nature and Content of Articles of Association As per the Companies Act, 2013, the articles of association of different companies are supposed to be framed in the prescribed form, since the model form of articles is different for companies limited by shares, companies limited by guarantee having share capital, companies limited by guarantee not having share capital, an unlimited company having share capital and an unlimited company not having share capital

22. Provisions for Entrenchment - The concept of Entrenchment was introduced in the Companies Act, 2013 in Section 5(3) which implies that certain provisions within the Articles of Association will not be alterable by merely passing a special resolution and will require a much more lengthy and elaborate process. The literal definition of the word “entrench” means to establish an attitude, habit, or belief so firmly that bringing about a change is unlikely. Thus, an entrenchment clause included in the Articles is one which makes certain changes or amendments either impossible or difficult. Provisions for entrenchment can only be introduced in the articles of a company during its incorporation, or an amendment to the articles brought about by a special resolution in case of a public company, and an agreement between all the members in case of a private company.

23. Section 6 of the Companies Act, 2013 provides that:- (a) the provisions of this Act shall have effect notwithstanding anything to the contrary contained in the memorandum or articles of a company, or in any agreement executed by it, or in any resolution passed by the company in general meeting or by its Board of Directors, whether the same be registered, executed or passed, as the case may be, before or after the commencement of this Act; and (b) any provision contained in the memorandum, articles, agreement or resolution shall, to the extent to which it is repugnant to the provisions of this Act, become or be void, as the case may be..

24. Alteration of Articles - A company has a statutory right to alter its articles of association. But the power to alter is subject to the provisions of the Act and to the conditions contained in the memorandum. Section 14(1) provides that subject to the provisions of this Act and the conditions contained in its memorandum, if any, a company may, by a special resolution, alter its articles including alterations having the effect of conversion of a private company into a public company; or a public company into a private company.

25. First proviso to section 14(1) lays down that where a company being a private company alters its articles in such a manner that they no longer include the restrictions and limitations which are required to be included in the articles of a private company under this Act, the company shall, as from the date of such alteration, cease to be a private company. Second proviso to section 14(1) stipulates that any alteration having the effect of conversion of a public company into a private company shall not take effect except with the approval of the Tribunal which shall make such order as it may deem fit.

26. Every alteration of the articles under this section and a copy of the order of the Tribunal approving the alteration as per section 14(1) shall be filed with the Registrar, together with a printed copy of the altered articles, within a period of fifteen days in such manner as may be prescribed, who shall register the same. [Section 14 (2)] Any alteration of the articles registered under section 14(2) shall, subject to the provisions of this Act, be valid as if it were originally in the articles. [Section 14(3)] The right to alter the articles is so important that a company cannot in any manner, either by express provisions in the articles or by independent contract, deprive itself of the powers to alter its articles [Walker v. London Tramway Co. (1879) 12 Ch. D. 705].

27. Binding effect of Memorandum and Articles of Association - After the Articles and the Memorandum of a company are registered, they bind the company and its members to the same extent as if they had been signed by each of the members of the company. Binding the company to its members The company is naturally completely bound to its members to adhere to the articles. Where the company commits or is in a place to commit a breach of the articles, such as making ultra vires or otherwise illegal transaction, members can restrain the company from doing so, by way of an injunction. Members are also empowered to sue the company for the purpose of enforcement of their own personal rights provided under the Articles, for instance, the right to receive their share of declared divided.

28. Members bound to the company Each member of the company is bound to the company and must observe and adhere to the provisions of the memorandum and the articles. All the money that may be payable by any member to the company shall be considered as a debt due. Members are bound by the articles just as though each and every one of them has signed and contracted to conform to their provisions. In Borland’s Trustees v. Steel Bros. & Co. Ltd., the articles the company provided that in the event of bankruptcy of any member, his shares would be sold at a price affixed by the directors.

29. Binding between members The articles create a contract between and amongst each member of the company. However, such rights can only be enforced by or even against a member of the company. Non binding in relation to outsiders Contrary to the above conditions, neither the memorandum nor the articles constitute a contract between the company and any third party. The company and its members are not bound to the outsiders with respect to the provisions of the memorandum and the articles. For instance, in the case of Browne v La Trinidad , the articles of the company included a clause that implied that Browne should be a director that should not be removed.

30. The doctrine of Constructive Notice - Every person dealing with the company whether as a shareholder or as an outsider, presumed to have known the contents of the two important public documents of the Company. Imputation of Knowledge as to the contents of the memorandum an the articles is known as Constructive Notice. In other words, every person dealing with the company is deemed to have a “constructive notice” of the contents of its memorandum and articles. In fact, he is regarded not only as having read those documents but also as having understood them according to their proper meaning [Griffith v. Paget, (1877) Ch. D. 517]

31. Consequently, if a person enters into a contract which is beyond the powers of the company, as defined in the memorandum, or outside the limits set on the authority of the directors, he cannot, as a general rule, acquire any rights under the contract against the company [ Mohony v. East Holyfrod Mining Co., (1875) L.R. 7 H.L. 869]. For example, if the articles provide that a bill of exchange to be effective must be signed by two directors, a person dealing with the company must see that it is so signed; otherwise he cannot claim under it.

32. In another case, the articles required that all documents should be signed by the managing director, secretary and the working director on behalf of the company. A deed of mortgage was executed by the secretary and the working director only and the Court held that no claim would lie under such a deed. The Court said that the mortgagee should have consulted the articles before the deed was executed. Therefore, even though the mortgagee may have acted in good faith and the money borrowed applied for the purpose of the company, the mortgage was nevertheless invalid [ Kotla Venkataswamy v. Rammurthy , AIR 1934 Mad 579 ].

33. For Interpretation of MOA and AOA – A Lakshamanaswami Mudaliar v. LIC of India (1963)

34. Doctrine of Indoor Management - According to this doctrine, as laid down in Royal British Bank v. Turquand , (1856) 119 E.R. 886, persons dealing with a company having satisfied themselves that the proposed transaction is not in its nature inconsistent with the memorandum and articles, are not bound to inquire the regularity of any internal proceedings. In other words, while persons contracting with a company are presumed to know the provisions of the contents of the memorandum and articles, they are entitled to assume that the provisions of the articles have been observed by the officers of the company. It is no part of the duty of an outsider to see that the company carries out its own internal regulations.

35. In Royal British Bank v. Turquand , the directors of a banking company were authorised by the articles to borrow on bonds such sums of money as should from time to time, by resolution of the company in general meeting, be authorised to borrow. The directors gave a bond to Turquand without the authority of any such resolution. It was held that Turquand could sue the company on the strength of the bond, as he was entitled to assume that the necessary resolution had been passed. Lord Hatherly observed : “Outsiders are bound to know the external position of the company, but are not bound to know its indoor management”.

36. Section 176 Provides for the Validity of Acts of Directors – No act done by a person as a director shall be deemed to be invalid, notwithstanding that it was subsequently noticed that his appointment was invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in this Act or in the articles of the company: Provided that nothing in this section shall be deemed to give validity to any act done by the director after his appointment has been noticed by the company to be invalid or have been terminated.

37. The object of the section is to protect persons dealing with the company - outsiders as well as members by providing that the acts of a person acting as director will be treated as valid although it may afterwards be discovered that his appointment was invalid or that it had terminated under any provision of this Act or the Articles of the company [Ram Raghubir Lal v. United Refineries (Burma) Ltd., (1932) 2 Com Cases 359; AIR 1931 Rang 139].

38. EXCEPTIONS TO THE DOCTRINE OF INDOOR MANAGEMENT Where the outsider had knowledge of irregularity - Howard v. Patent Ivory Co. (38 Ch. D 156) No knowledge of memorandum and articles -Rama Corporation v. Proved Tin & General Investment Co. (1952) Forgery - Rouben v. Great Fingal Consolidated (1906) AC 439 Negligence - Underwood v. Benkof Liverpool (1924) 1 KB 775

39. Again, the doctrine of indoor management does not apply where the question is in regard to the very existence of an agency. In Varkey Souriar v. Keraleeya Banking Co. Ltd. (1957) 27 Com Cases 591 (Ker.), the Kerala High Court held that the ‘doctrine of indoor management’ cannot apply where the question is not one as to scope of the power exercised by an apparent agent of a company but is with regard to the very existence of the agency. This Doctrine is also not applicable where a pre-condition is required to be fulfilled before company itself can exercise a particular power. In other words, the act done is not merely ultra vires the directors/officers but ultra vires the company itself — Pacific Coast Coal Mines v. Arbuthnot (1917) AC 607.